Robert Lewis is a former General Counsel and now works as International Managing Partner with Chinese law firm Zhong Lun in Beijing. He is one of relatively few Western lawyers to make this transition and this, coupled with his commercial experience, makes him an invaluable resource.
I was therefore very interested when Robert alerted me to a blog series he has written to provide ‘A Foreign Lawyer’s View from the Inside’.
You will need to read the original articles to gain all the insights that are offered, but a number of points struck me and I will therefore write a brief summary. Firstly, Robert comments upon the rapid maturing of the Chinese law firms and observes that they retain a monopoly on litigation and regulatory advice. In addition, the Chinese Government has put controls over the extent of any merger with a non-Chinese firm, requiring a high degree of operational separation (which does not apply if the Chinese firm is itself expanding overseas). Given Robert’s expectation that the industry will see a lot more mergers over coming years, this could be a significant issue. Right now, he reports, most of the foreign firms operating in China are believed to be running at a loss.
The most successful foreign law firms are those which traditionally had a base in Hong Kong. This experience appears to have offered a sustained advantage, even though most work has now moved to Beijing or Shanghai. Hong Kong’s separate legal system and readiness to work in English is not an advantage when it comes to doing business in mainland China, where English-language negotiation is almost unheard-of. Hong Kong does remain the preferred center for dispute resolution.
Negotiators must be prepared to work in Mandarin, or at the very least in dual language with translators. They must also accept that the form and structure of contracts is very different from that of the West.
When it comes to selecting a law firm, Robert has built from the annual survey undertaken by The Lawyer. He lists the top twenty local firms and the top twenty international firms. There are relatively few ‘full service’ options – most choose to specialize. The leaders are also firmly based in Beijing, not – as some expect – in more commercially-minded Shanghai. Robert comments on the distinction between ‘rule of law’ and ‘rule by law’ – with China firmly in the latter category. This, he observes, means that being close to Government and the ministries where law is made remains fundamental to legal practice.
Overall, a very useful set of articles for anyone needing to understand more about the Legal market in China, or having the need to identify a local provider or adviser.
There are of course many factors that influence supplier selection and retention, but the bidding, negotiation and contracting experience are significant elements. So what are the things that buyers most value – or most dislike – when dealing with a supplier during this phase of their relationship?
IACCM has started a series of studies to explore this question and also to discover which suppliers are offering the best (or worst) customer experience during the negotiation or contracting phase. The work kicked off with research into the Outsourcing and IT Services sector and preliminary results are now available.
Leaving aside obvious issues such as honesty and integrity (which we naturally assume to be essential to doing business in categories such as this), the number one challenge that buyers tell us they encounter with this supplier group is ‘inflexibility of contract terms’. It is the top issue for 55%. Second on the list with 47% is frustration over the inability of the supplier negotiation team to close issues / make decisions; and 43% cite failure to provide an understandable contract. Clearly each of these it to a large extent an avoidable issue (though in their defense, many suppliers would argue that customers often demand unrealistic or inappropriate terms). However, the fact that buyers experience quite different approaches on these issues from major suppliers proves that those who are failing to perform could do better. And on a matter like ‘understandable contracts’, what excuse is there? How can it be in either party’s interests to produce contract terms or structures that are difficult to understand?
So what about positive differentiators? The number one attribute here is responsiveness, identified by 60%. In second place is ‘being treated like a business partner’ – by which buyers mean only that there is a fair and effective resolution of issues, not that the supplier gives way every time. They expect timely and rational discussion – which is borne out by the item in third place, that the supplier fields ’empowered decision makers’. There is plenty of evidence that dealing with questions on the spot leads to faster and less demanding resolution; the longer it takes to resolve, the more those demands increase and the more confidence in capability reduces.
The economic downturn has had a significant effect on negotiations for 35% of those responding and they tell us that suppliers have been quite variable in the extent to which they adjusted to market conditions. Interestingly, Infosys emerged as the most adaptive – perhaps because it was in some ways removed from the early crisis facing its rivals in the West.
IACCM also asked which terms were most critical when it came to supplier negotiations. By far the most important is data protection, with 73% rating this as critical – outpacing second placed indemnities by 40%. Tying for third place on the ‘critical’ list are liabilities and service levels. Despite all the publicity about their importance, innovation and continuous improvement lagged far behind, with 57% rating them as either somewhat or not at all important – to some extent explaining why these items are often a subsequent source of disappointment.
The rankings of individual suppliers are not being published by IACCM, except to legitimate contributors to the survey.
Adrian Gonzales has once again raised an interesting question on Logistics Viewpoints when he suggests ‘A Better Way to Evaluate Supply Chain Talent’.
The article makes the case for a more holistic view of ‘success’, essentially that measurements must focus on broad outcomes rather than narrow targets. He cites a supply chain expert who may exceed goals for savings, but at the expense of destroying key supplier relationships.
The challenge that Adrian highlights will be familiar to many in the world of contracts. We wrestle with many stakeholders who are motivated by specific interests and it is our job to understand those drivers and ensure objective assessment of the true business interests. But while this may be our theoretical role, it is often not recognized. Indeed, we know from research that many contracts professionals have very few performance measures and that this becomes a real problem when management starts pushing for precise performance data.
At IACCM, we have been able to develop extensive insights to the role and value of contract managers and more broadly of high-performing supply chain or commercial groups. These relate to direct contributions to business performance – stemming cost or revenue leakage, improving margin, reducing sources of customer dissatisfaction, raising competitiveness. Achieving these outcomes demands a more holistic analysis of contract performance than is typical, but the benefits of doing so are enormous.
Adrian is right to raise this question. Savings negotiated, risks avoided, compliance rates achieved are all the types of measures we commonly encounter, but they are rarely linked to impact analysis. What ultimate effect did those achievements have on the bottom line, on competitiveness, on efficiency? These questions are far too often unasked and unanswered.
Today’s business environment has increased concerns about disaster recovery. The growing dependence on remote suppliers, often linked via fragile technologies, has combined with a growth in regulatory requirements and broader reputational risk to push this topic up the list of ‘most negotiated terms’.
I am pleased to see that several US regulatory authorities combined forces to develop guidance on business continuity and disaster recovery. They have just issued their report which covers a wide range of areas that an organization should consider in order to protect itself from unexpected disruption. The guidance is aimed at those responsible for compliance and may therefore assist contract specialists as they consider the nature of the commitments they wish to seek or offer to trading partners.
It is early to hail a trend in the attitude and role of regulators and auditors, but I see encouraging signs that they are emerging from a world where they simply made judgments on poor performance, to a growing recognition that their insights and observations can be used to assist in prevention.
A recent article in The Economist is just the latest to illustrate the extent of job erosion for ‘skilled labor’, with growth occurring for executive and professional management and for low-end service and support tasks.
Time and again I hear from top management and academics about the need for increased commercial competence and judgment and the ‘skill deficit’ they face in coping with today’s challenging markets. They see groups like Procurement and Contract Management as transactionally-oriented, coping with work at an operational level, but contributing little to strategic or market capability. In that sense, they are ‘skilled labor’ – and their role is therefore under threat of being steadily squeezed.
“People, people, people – those are the big problems,” observed one academic yesterday. “We need to re-skill existing staff”. He was speaking in the context of Procurement and brushed aside any suggestion that the issue is due to the narrow scope of Procurement role or the constraints imposed by the current focus on savings. This view was reinforced during another conversation, with the head of HR at one of the largest aerospace and defense manufacturers: “It isn’t the role or measurements that constrain them – it is their unwillingness to expand their thinking and contribution”.
Fundamental to the survival of any skill group is its readiness to adapt and change. The transactional and operational work performed by purchasing and contract management groups is steadily being replaced by automation or by service and support centers. The value work is moving up the scale, to people who can think strategically, who are excited by the power of analytics, of concepts such as holism, who want to drive and influence policies, practices and process and to empower the organization through their depth of knowledge. This demands fresh thinking and a readiness to challenge existing knowledge and methods (characteristics which, based on IACCM data, are possessed by no more than 15 – 20% of the existing expert community).
The role being demanded by top management is very different and many find it threatening. Indeed, as I commented to the academic, why would he expect that many people can make this transition in skills? They chose a job that requires different competencies from the requirements of today, so perhaps it is a case of the wrong people with the wrong aptitudes – and therefore in many cases unable to escape ‘the squeeze’.
The debate goes on and on. What role should Legal have in the negotiation and drafting of contracts? When they insist on transactional review and approval, do they finish up managing risk, or creating risk?
This issue arose yet again in an email from an IACCM member, frustrated by the delays, the difficulty of meeting business objectives, the risk aversion (in her opinion) of the Legal department. So what should the role of the lawyers be, she asked.
I do not know her company so my reply was generalized. Here is what I said. What would you suggest?
“I understand why you are asking these questions and yes, many organizations face similar problems, though many have also resolved them.
In the end, Legal (and any other specialist stakeholder) should be seeking to enable good business decisions and to meet business goals regarding flexibility, achieving value, being responsive to the market. The situation you describe does not satisfy those goals because it imposes a control mechanism that gets in the way of good judgment and delays processing. This creates counter-risks in the name of Legal’s view of ‘good risk management’.
I do not know whether Legal has legitimate concerns about the competence of the Contracts team, but if that is the case they should work to train them better. They should also be offering support for a ‘negotiation playbook’ that would include approved term alternates and the circumstances in which they can (or cannot) be used. They should be thinking about the nature of the reporting they require to understand the use of such alternates and also the terms of delegated authority. For example, one Law Department agreed delegation to staff who had achieved IACCM Certification.
Yes, you should also be looking at overall process performance. We have benchmarks on many things, including cycle times for different contract types. So how do you compare? If you are not doing well, why is that? Where are the major delays and what is causing them? I could give you opinions on the likely problems, but in the end you need a proper process analysis and commitment to reengineering.
All of this can be achieved, but you will most likely need a very senior executive sponsor, because (as your note indicates) there are many stakeholders and they are often reluctant to give up their power. They fear for their jobs and the ‘mystery’ that surrounds their expertise. They may also have genuine and valid concerns about the competence of those who will make decisions, or whether those decisions are driven by inappropriate success criteria (ie that terms are given away in return for price reductions).
It sounds as if you really need to pursue a significant project on this. And the success of that will depend on whether you can gain strong management support for the potential benefits it brings. Perhaps you can tell me what are some of the top management goals right now? What are they saying is important to the business and how would improvements in the contracting process assist in achieving those goals?”
Today I spent a couple of hours reviewing the Supplier Relationship Management process that has been put in place by an IACCM member company. it is more ambitious than many, in that it covers some 6o suppliers and – to its credit – introduces a graduated process, whereby business units can adopt similar steps for suppliers they deem locally important.
Program definition is thorough and has been adopted across the enterprise – itself no mean feat. But it seems to me that it suffers from a challenge that I am finding endemic to SRM programs. That is, it lacks clarity of purpose and desired outcomes. As a result, it is struggling to demonstrate significant value. It has become a glorified compliance program, with its only significant benefit being that a supplier’s performance and reviews are undertaken in a more coherent way. Previously, everything was done at the business unit level.
Our analysis is not yet complete, but as with other SRM reviews, it seems inevitable that we will be pushing for much greater clarity over the value to be achieved from this investment. In particular, it needs far more mutuality in performance management; it needs to be more creative over real-time reporting so that issues and opportunities are identified and acted upon early; it needs to re-balance the negative (what is going wrong) with the positive (what opportunities could we be grasping).
The process also fails to integrate experience across the portfolio of accounts. Individual relationship managers seem to operate in a vacuum, whereas there must be so much potential learning to be gained from this portfolio of 60 major suppliers. Without knowledge sharing and analytics, the program will struggle to develop insights to ‘best practice’ and it seems tome only a matter of time before management asks ‘Why are we spending money on this additional layer of compliance monitoring?’
Later this week, IACCM is running a webinar on the current status of SRM programs. See the IACCM events calendar at www.iaccm.com for details
I just read an article by Larry Lapide, “The Promise and Pitfalls of Big Data”. In it, he observes that making effective use of data is nothing new, but the digital age has transformed the volume and speed with which information can be accessed. In this environment, ‘Picking the right data streams is extremely important, since not all data is information. Information supports improved decision-mak- ing, and not all data is useful for that.’
In the world of contract and commercial management, a typical start point is of very little data and almost no information. The extensive work that IACCM undertakes on benchmarks has illustrated just how little information is gathered on a regular or consistent basis. We have lists of the measures that are or can be used, but there is no consistency across organizations in those they select – or indeed, whether they collect data at all.
Among the most common measures are things like expense to revenue ratios, or numbers of contracts handled per employee. These seem to me of little merit, because in isolation they tell us nothing about relative value. Data on things like cycle times has more meaning, so long as there is accompanying analysis of where and how time is spent, allowing deeper analysis and potential for improvement. But all of the easy and most frequently used data tends to relate to efficiency and if I were leading a contracts or commercial group, I would be far more interested in measures of effectiveness. That is the stuff the executives really want to hear about, the information that drives improved business results through enhanced competitiveness.
In this category come measures such as the level of market push-back on terms and conditions, the frequency (and type) of claims or disputes, the percentage of contracts that are performing in accordance with expectations (and reasons why they are not), the sources of actual (versus theoretical) risk and the extent to which classical risk theory actually causes risks to occur. This type of information directly supports decision-making. It influences internal policies and practices; it highlights areas where capabilities are misaligned with market needs; it generates insight into opportunities for cost-saving or revenue improvement.
Ultimately, it seems to me that those who grasp the potential of better data extraction will rise to the top in terms of the value they bring and the influence they exert. Contracts are a little like shale gas – a largely unexploited source of energy. In this case, that energy could be powering a massive improvement in business performance – but it needs someone with enthusiasm and imagination to exploit it.
It is interesting that despite record low interest rates and robust stock-turn rates, there is continued pressure to extend the payment period. A couple of years ago, the average was 57 days; now (according to data being assembled by IACCM) it is just over 60.
One possible reason could be the difficulty companies are having in obtaining short-term funds from the banks. However, this does not stand up to examination since the drive is being led by larger corporations, which are sitting on record cash piles.
Another possibility could be that this is a strategic move, designed to take advantage of the lower resistance that suppliers may show because of the low cost of money.
IACCM research will shortly explore this topic in more depth, to discover what is going on.
Meantime, the issue facing suppliers is not only the contracted period for payment, but also the actual time it takes to get paid. An article in CFO magazine suggests that this is not entirely due to poor levels of compliance by customers, but actually has more to do with invoicing errors by suppliers. While this is certainly an explanation, investigations by IACCM suggest that many of those ‘errors’ are due to either unclear or altered processes by customers. For example, many have tortuous internal approval processes which are frequently not understood by the group that placed the order. Another common ‘trick’ is to change the invoicing address, but not alert suppliers to that change until they chase for payment.
The issues with getting paid seem to be more pronounced in companies that have outsourced their accounts payable, which raises questions over how much they know or control the behavior of their outsourced provider.
Getting paid is fundamental to doing business. Customers that value supplier loyalty should focus on the fairness and integrity of this key process and contract term.
Guy Strafford recently wrote a blog that asked whether the word ‘Procurement’ is toxic. He asked readers to suggest an alternative name that might assist an image make-over – and offered a bottle of champagne to the winning idea.
The blog attracted lively input, a majority agreeing that Procurement tends to be viewed in a relatively negative light. The underlying sense appears to be that the role is seen as narrow in its contribution and that it has never achieved the respect associated with established professions. Those who made comments overwhelmingly agreed that a change of name would be beneficial, though there was no apparent consensus over what that should be (perhaps because of the desire to win the champagne). However, the term ‘Commercial Management’ arose several times because of the need to reflect both a broader role and also a more holistic basis for the selection and management of supply relationships.
In many ways, Contract Management faces a similar challenge. The role and status of Contract Managers varies widely, resulting in confusion in both scope and contribution. As with Procurement, for many it remains a largely tactical, administrative role, supporting ‘true professionals’ such as lawyers or project managers.
The image will not be fixed just by changing the name; it requires a genuine and sustained shift in business value and contribution. The opportunity for such a shift exists and those who identified the potential in Commercial Management are correct. ‘Commercial capability’ is a big deal right now because senior management is increasingly conscious of the need for improved decision-making and commitment processes, achieving a balance between control and creativity in external trading relationships. This has resulted in a surge of membership and training for IACCM, from both buy-side and sell-side personnel.
The IACCM vision has long been that those responsible for creating and managing trading relationships should represent a single profession because they require similar knowledge, tools and techniques. But we know that it is often hard to change management attitudes and images; and indeed, many of the incumbents in Procurement and Contract Management may not have the internal drive or desire to move to a higher level of contribution and ‘professionalism’.
So perhaps the real point behind a change of name is to establish a division between those who are content with their largely administrative, operational role and those who have the enthusiasm to rise to new challenges and grasp the opportunities that come with professional status. However, it has been pointed out to me in the past that ‘true professions’ all have a singular noun to describe them and do not use the word ‘manager’ – for example, lawyer, accountant, engineer, even ‘marketeer’. And in that case, is Commercial Manager the right name?
Commitment Matters 